Dollar takes off after RBA speech

The Australian dollar surged to new seven-year highs just after the close of local trading, as market players took comments from the Reserve Bank of Australia deputy as an indication that the central bank still had more interest rate rises in store.

The dollar closed local trading at US79.36c, up from US79.07c on Monday. However, in early London trading the dollar had shot up to US79.74c.

Economists said RBA deputy governor Glenn Stevens yesterday signalled the central bank still had a tightening bias to its interest rate policy.

SG Australia strategist John Horner said the deputy's speech set a slightly more "hawkish" tone, which provided support for the dollar in afternoon trading.

In his speech, Mr Stevens said the "neutral" interest rate would help keep the economy growing at its full potential with steady inflation, in the absence of any external shocks.

While Mr Stevens admitted that estimates of the neutral rate "always have a margin for error", he used the past decade as a rough guide. He said while overnight cash in the 4 to 5 per cent range had caused "marked accelerations" in spending, rates in the 6.25 per cent to 7.5 per cent range had "helped to slow it".

As a result, economists said Mr Stevens indicated that the neutral rate was somewhere roughly between 5 and 6.25 per cent.

"With overnight cash currently at 5.25 per cent, closer to the bottom end of that band, the consensus in the market is that another rate hike or two will be needed to get cash back to a 'neutral' rate of 5.50 to 5.75 per cent," AAP chief economist Garry Shilson-Josling said.